A great number of leading American companies choose to post their earnings with Wall Street on a regular basis. On the whole, the key rationale for this policy is to show that the firm continuously grows and its profitability constantly increases. Yet, such strategy gives rise to many questions. First, is it actually permissible to post only flat earnings? To some extent, this practice contradicts generally accepted accounting principles (GAAPs). Secondly, it is necessary to discuss various implications of such disclosure. Under some circumstances, this policy does not bring any dividends to the enterprise.
On the one hand, such strategy is quite feasible because it enables the management to attract potential sponsors and find new partners. The person, who sees that income rates of the firm are always rising, is most likely to think favorably of it and eventually invest capital. Moreover, he or she usually believes that this investment will eventually yield fruits. As a matter of fact, such behavior can be described as advertising, aimed to create a reputation for the firm. Perhaps, this is the main reason why so many US corporations prefer to disclose this specific part of their income statements.
However, in terms of accounting ethics, it is not quite acceptable to act in this way. The thing is that flat earnings practically give no insights into financial situation within the firm. In order to make a balanced decision about the real state of affairs; a good investor always pays careful attention to ROE (return on equity), cost of profit, debt-equity ratio and many other indicators which are more informative (Brigham & Daves, 2007). Thus, it is quite possible to say that posting earnings is very misleading and even deceiving. In this regard, we need to remember that GAAPs set stress on the importance of full disclosure (Epstein et al, 2007, p 304). It is quite difficult to determine whether the companies, publishing their profits with Wall Street, should be penalized or not. They do not violate existing legislation but they have to release detailed income statements, which should include their losses, expenses on R&D (research and development), marketing and so forth. This will give a chance to investors to make an informed decision about the performance of these companies.
Apart from that, one can argue that some firms, which have already established their names, do not even need to post their flat earnings. For instance, Proctor & Gamble no longer requires such form of advertisement. Their products enjoy enormous demand in the market; furthermore, their brand speaks for itself. Investors no longer hesitate about profitability of this enterprise. Naturally, they may post their post their earnings with Wall Street but there is no necessity to do it constantly. Additionally, it is even more advantageous for them to release full income statements, so that public and private organizations could get a better idea about operations in this firm, allocation of costs, sources of revenue etc. A versed investor can hardly be satisfied with mere disclosure of earnings.
So this discussion indicates that this policy may be cost-efficient because in this way private businesses can demonstrate to the community that their income increases on a regular basis. But at the same time, such conduct contradicts GAAPs. The principle of full disclosure must be the major guidelines for accountants as well as managers. Finally, some corporations no longer need to post their earnings with Wall Street.
Reference List
Brigham, E.F., & Daves, P.R. (2007). Intermediate Financial Management. Mason, OH: Thomson South-Western (Cengage Learning).
Epstein B.S. Nach. R, & Bragg, S. (2007). Wiley GAAP 2008: interpretation and application of generally accepted accounting principles. New York: John Wiley and Sons.